Tag Archives: repayment

CVC VAT Focus 23 August 2018

HMRC NEWS

Local authorities and similar bodies

Decide which activities are business or non-business for VAT purposes if you’re a local authority or other public body.

Apply for the Fulfilment House Due Diligence Scheme (Notice FH1)

Find out if you need to be registered to store goods in the UK for sellers established outside the EU.

Administrative agreements with trade bodies (VAT Notice 700/57)

Details of administrative agreements relating to VAT on certain specific transactions between members of trade bodies and HMRC.

Software suppliers supporting Making Tax Digital

Find out which software suppliers HMRC is working with to produce suitable Making Tax Digital for VAT software for businesses and their agents.

 


CASE REVIEW

CJEU

1. Estonian Sales Tax Illegal?

The issue before the court in this instance was whether Article 401 of the VAT Directive must be interpreted as barring the maintenance or introduction of a local sales tax. The City of Tallinn introduced a 1% local sales tax which affected Viking Motors and other appellants, Viking Motors challenged the legality of this tax on the basis that the EU law on VAT only allows one turnover tax: VAT.

Giving consideration to the nature of VAT and how it is applied, it was concluded that there were sufficient differences between EU VAT and local sales tax for the two to run in tandem. It was held that Article 401 does prevent the introduction of another turnover tax but in this instance, as the cost could be absorbed by the business rather than being passed on to the consumer, the two taxes are sufficiently different to not breach EU law.

CVC Comment: There is a very high degree of scrutiny offered by the Courts when it comes to challenging the legality of domestic laws and taxes under EU law. In this case it was held that the nature of how the tax is applied, despite being materially the same, made the two taxes sufficiently different.

 


2. VAT on Joint Venture Costs

 

TGE Gas Engineering GmbH (TGE) is a company established in Germany which entered into a joint venture with a company called Somague Engenharia SA in Portugal in order to expand a gas terminal in Portugal on behalf of a utility company. TGE obtained a Portuguese tax ID number as a non-established person in that country in order to create an economic interest group to carry out the joint venture.

After this TGE set up a branch in Portugal and obtained another tax ID from the Portuguese authorities. This branch provided services to the joint venture which were charged on to the utility company and it was also invoiced for the costs to TGE in Germany.

The Portuguese tax authorities had previously denied recovery of the input VAT incurred on these costs based on special domestic rules applying to joint ventures. The Court held that Articles 167 and 168 of the VAT Directive and the EU principle of neutrality must be interpreted as preventing domestic tax authorities from regarding a company which has its headquarters in another Member State and the branch which it has in the first of those States as constituting two separate taxable persons. For that reason, they are also prevented from refusing that branch the right to deduct the VAT on the expenses incurred on behalf of the joint venture/parent company.

CVC Comment: The UK tax authorities may view joint ventures as a taxable person in its own right for VAT purposes. In that scenario, it is the joint venture that has the right to recover any VAT incurred, rather than the parties to the joint venture. This serves as a useful reminder that purchase invoices should be addressed to the correct taxable person. The business activities of a joint venture should be considered in its own right, and an obligation for a joint venture to VAT register may arise if the parties arrangements are considered to form a partnership. A joint venture may choose to VAT register voluntarily in order to recover VAT incurred (subject to the usual VAT recovery rules).

 


3. Municipalities: Entitled to deduct?

 

The Polish municipality of Ryjewo constructed a building in Poland and the made a “cultural centre” responsible for the management of the property, allowing them to use the building free of charge. This was allocated as a non-taxable activity for the taxation authorities, despite The Municipalities’ VAT registration, as there was no charge made.

Four years later a part of the building was rented out commercially, The Municipality sought to adjust the deduction of input VAT paid for the building, now attributing this part of the building to a taxable supply. The relevant Polish Minister had reached a decision that VAT was not deductible for The Municipality as the building was not used for an economic activity. This is appealed against.

The Court find in favour of The Municipality, concluding that at the time the building was constructed it was acting in its capacity as a taxable entity and not as a non-taxable Government body. VAT is deductible despite the building having initially been put to 100% non-taxable use by a public body.

CVC Comment: Even though no intention to later use the building to make taxable supplies was declared and there was an argument for no economic activity having previously taken place, the deduction was allowed by the CJEU. This is because the right to deduct input VAT is a fundamental aspect of the VAT system. Ultimately, the first use of the building did not matter as this only determines the initial reclaim, adjustments are to be made in line with changes in taxable/non-taxable use. This case may be of interest to organisations that have made an initial non-business use of capital expenditure on property.

 


First Tier Tribunal

 

4. Gaming Machines and Fixed Odds Betting Terminals

 

The issue before the Tribunal in this instance concerned revisiting the EU principle of fiscal neutrality. The Rank Group (Rank) made supplies of gambling through gaming machines including fixed odds betting terminals (FOBTS) and “casino jackpot machines”. The casino jackpot machines were specifically excluded from the exemption to VAT but FOBTS were exempt from VAT before 6 December 2005 when the definition of “gaming machine” was extended.

Rank made a claim for repayment of VAT which it had charged and accounted for in relation to the jackpot machines on the grounds that the two machines were similar and treating their supplies differently for VAT purposes was contrary to the principle of fiscal neutrality.

After a detailed consideration of relevant case-law and analysing the different types of machines to draw similarities and differences between the two, the Tribunal concluded that, despite certain differences, these differences did not have a significant influence on the average consumer’s decision to use one or the other. The Tribunal found in favour of Rank and allowed the appeal against a decision to deny VAT recovery.

CVC Comment: This case shows that the Tribunal will have regard to how the consumer interprets what he/she is purchasing and the material aspect of the supply. It was observed in the judgment itself that to try to draw distinctions within individual gaming machines and games could lead to absurdities of different rates of tax being applicable to one machine. HMRC will often apply similar tests to that of the Tribunal although when analysing transactions.

 


 

CVC VAT Focus 26 July 2018

HMRC NEWS

HMRC publishes more information on Making Tax Digital

HMRC has published further information on Making Tax Digital to support businesses and agents in the run up to the start of the mandatory Making Tax Digital VAT service from April 2019.

Revenue and Customs Brief 7 (2018): VAT – motor dealer deposit contributions

This brief explains HMRC’s policy on the VAT accounting treatment of promotions where payments are made to finance companies by motor dealers for the customer.

Draft legislation: Amendment of the VAT (Input Tax) (Specified Supplies) Order 1999

This is the consultation on draft amendments to the Specified Supplies Order to address the issue of VAT off-shore looping in the financial services sector.

Registration scheme for racehorse owners (VAT Notice 700/67)

Find out if you can register for VAT under the VAT registration scheme for racehorse owners

Help and support for VAT

Get help with VAT by using videos, webinars, online courses and email updates from HMRC.

 


CASE REVIEW

CJEU

1.Acquisition and holding of shares: An economic activity?

This French referral concerned the letting of a building by a holding company to a subsidiary and whether this would constitute involvement in the management of that subsidiary, giving rise to a right to deduct input VAT incurred on the acquisitions of holdings in the subsidiary. If found to constitute management, the acquisition and holding of shares in the subsidiary would be an economic activity.

Marle Participations (Marle) is the holding company of the Marle Group. It let a building to some of the subsidiaries whose shareholdings it also managed. It conducted a restructuring operation which led to purchases and sales of securities, it sought to recover input VAT incurred in the course of the restructure. During a VAT audit, the tax authorities issued assessments to recover VAT claimed. This was on the basis that the expenditure by Marle was capital in nature and so a right to deduct VAT incurred did not arise. Marle appealed this decision.

The referral from the French court asks whether the VAT Directive must be interpreted as meaning that the letting of a building by a holding company to its subsidiary constitutes involvement in the management of that subsidiary, which must be considered an economic activity.

The CJEU considered case law and the VAT Directive. It was held that the involvement of a holding company in the management of subsidiaries constituted an economic activity where the holding company carries out a taxable transaction. The Court decided that the letting of a building to the subsidiary did constitute an economic activity so there was a right to deduct VAT incurred on expenses relating to the restructuring giving rise to the acquisition of shares in the subsidiary.

However, it was also held that where the holding company is only involved in the management of some subsidiaries but not all, then a fair apportionment method must be used to calculate the amount of input VAT to be recovered.

CVC Comment: This decision is relevant to the recovery of VAT incurred by holding companies. If holding companies make taxable supplies (in this case taxable lettings of buildings to subsidiaries) then, subject to the usual rules, input VAT recovery rights are likely to arise. Restructuring a company and transferring securities can lead to very complex supplies and processes which can be hard to classify. What can, on the face of it, take place as an accounting entry can give rise to a real-life tax liability. Before taking on any restructuring projects professional advice should be sought to provide certainty of compliance.


 

2. Right to deduct: Transactions did not take place

The Court heard two requests for a preliminary ruling concerning the interpretation of the EU law concerning the right to deduct input tax.

The two companies, SGI and Veleriane, are established and operate in France purchasing equipment intended to be leased to operators in France. Following a VAT audit, the tax authorities challenged the right to deduct VAT on various purchases as the invoices did not relate to any particular delivery and issued assessments of VAT to this effect. Both companies claim to have acted in good faith with regard to these transactions but the referring court highlights that the companies could not have been unaware of the fictitious nature of some of the transactions and the associated overcharging.

SGI claims that, in the absence of any serious indication of fraud, it is not obliged to prove to the authorities that the transactions took place and Valeriane claim the referring court did not consider whether the tax authorities had adduced the necessary proof that it knew or ought to have known that the transactions were connected with VAT fraud.

The domestic Court referred the question of whether the EU law must be interpreted as meaning that, in order to deny a taxable person in receipt of an invoice the right to deduct VAT appearing on that invoice, it is sufficient that the authorities establish that the transactions covered by that invoice have not actually been carried out or whether those authorities must also establish that taxable person’s lack of good faith.

Giving consideration to the principles of legal certainty and fiscal neutrality, the Court held that under the EU law it is sufficient for the tax authorities to establish that the transactions have not taken place and there is no requirement to show a lack of good faith when denying the right to recover input VAT on transactions which have not taken place.

CVC Comment: The right to recover input VAT arises when VAT becomes properly chargeable. If no supply can be evidenced to have been made in relation to the invoice giving rise to a claim to deduct VAT then the VAT incurred is not deductible. It is important to be aware of supply chains and to ensure that each transaction actually takes place before submitting a VAT reclaim to avoid unexpected tax assessments.


 

Supreme Court

3. Relying on claims made by a former member of a group VAT registration

This appeal by HMRC concerns the validity and timing of claims for the repayment of incorrectly paid VAT by Carlton Clubs Limited and whether those claims could be relied on by the representative member of a group VAT registration.

HMRC had refused a number of claims for repayment of incorrectly paid VAT made on behalf of Taylor Clark Limited (TCL) by a subsidiary. TCL was the representative member of a VAT group registration which contained Carlton Clubs Ltd (CCL) by whom the claims were made as it carried on the activity of Bingo to which the claims related. TCL contended that these claims should be recoverable by itself as the representative member of the VAT group, highlighting that CCL was no longer in the group.

The FTT held that the subsidiary would have been entitled to the repayment of VAT and TCL could not rely on the claims as they were not made by TCL. The UT found that whilst TCL may have been able to reclaim VAT it did not make a claim for repayment within the time limits allowed, therefore there could be no repayment. The Court of Session, however, ruled in favour of TCL, stating that a claim may be made on behalf of the representative member of a VAT group by a former member and subsidiary.

The Supreme Court has ruled that the Court of Session erred in finding this to be the case. It was held that HMRC’s liability for overpaid output tax is owed to the person who accounted for the VAT (CCL). Unless CCL was acting as an agent to TCL at the time the claims were submitted, the claims cannot be relied upon by TCL now. After extensive consideration of the relationship between TCL and CCL, the conclusion was that CCL was not acting in the capacity of an agent by submitting the claims. The Supreme Court held in favour of HMRC and allowed their appeal.

CVC Comment: This case serves as a reminder of the importance of considering who is entitled to benefit from claims for overpaid VAT in the context of a group VAT registration. A consequence of VAT grouping is that any business activity carried out by a group member is treated as if it is done by the representative member.


 

UTT

4. Direct and immediate link with main economic activity

This appeal concerns whether a company established outside the EU is entitled to recover input VAT on the cost of tools leased to an EU company for no consideration. JDI is incorporated in the Cayman Islands and is part of a group of companies (The Baker Hughes Group). The FTT had previously agreed with HMRC that there was not a sufficient link between the acquisition of the tools by JDI and an economic activity to allow repayment of the VAT incurred.

JDI acquired the tools as part of a company restructure along with the intellectual property rights for the tools, VAT was charged on this supply which JDI sought to recover. The intellectual property gave JDI the right to manufacture further tools and spare parts. Rather than producing the tools itself, it gave out contracts to manufacturing companies to fabricate them. JDI paid the manufacturing companies for this but made no charge to the Baker Hughes Group in the Netherlands when leasing the tools to them. It contended that its main economic activity is the supply of spare parts to companies using the tools and therefore that there is a direct and immediate link between the acquisition of the tools and its main economic activity.

The Upper Tribunal agreed with the FTT and HMRC that the required direct and immediate link had not been established. There was no charge for the leasing of the tools. They were not connected with a taxable supply, VAT incurred was irrecoverable. It was also confirmed that JDI was not, in this capacity, acting as a taxable person.

CVC Comment: This case serves as a reminder of the importance of considering all aspects of arrangements entered into with connected parties. VAT incurred is recoverable to the extent that it relates to taxable business supplies. In this case as there is no charge for the lease of the tools there was no connection with the original purchase of those tools to a taxable supply so input VAT was wholly irrecoverable.


5. Place of supply rules

This appeal concerns the place of supply for the supply made by IC Wholesale Limited (ICW), a UK company, to customers in the Republic of Ireland of cars acquired in Cyprus and Malta. ICW  contended that as it had invoiced the customers in Ireland before the cars left Malta and Cyprus, despite the fact that the cars entered the UK, the supplies took place outside of the UK and therefore should not bear UK VAT.

The FTT found against ICW, concluding that the supplies had taken place in the UK as the cars physically arrived in the UK before being sold. It was also noted that ICW held insufficient evidence to demonstrate that the cars had been removed from the UK.

The UT agreed with the FTT, asserting that ICW used its UK VAT registration number when ordering the cars and the cars physically entered the UK. The suppliers were not informed that the vehicles would be re-sold and, in the absence of sufficient evidence of export, ICW must be treated as acquiring the goods in the UK and therefore the appeal must be dismissed.

CVC Comment: When exporting goods it is essential to retain evidence in order to support zero-rating of the supply. The place of supply rules are also important and should be borne in mind for each transaction involving the movement of goods into and out of the UK. For advice with any place of supply issues please contact CVC as there could be significant financial implications if VAT accounting errors are made.


6. Business/non-business apportionment

The Tribunal considered a claim for repayment of VAT relating to services supplied by NHS Lothian Health Board (LHB) to non-NHS, private customers such as local authorities. It was an agreed fact that VAT had been incurred and paid but not recovered by LHB in the period from 1974-1997.

The FTT originally rejected the claim for repayment on the basis that a business/non-business apportionment had not been calculated to an adequate extent. The FTT gave some consideration to partial exemption and direct attribution. This appeal focussed on whether this was incorrect. The appellants asserted that it was an error to consider direct attribution and partial exemption when all that was required was a business/non-business apportionment.

The UT found that it would have been an error of law for the FTT to rely on partial exemption principles when apportioning business/non-business activities for the purpose of input tax recovery. However, whilst the FTT did discuss partial exemption, the UT was content that the FTT had not relied on it and that they instead relied on the reasonableness of the proposed apportionment.

It was held that the FTT was entitled to find the proposed business/non-business apportionment unreasonable and its decision to reject the claim for input VAT recovery from 1974-1997 stands.

CVC Comment: In this case LHB sought to retrospectively extrapolate a partial exemption recovery percentage from a specific period from 2006 to 1997. Before making a retrospective claim for input VAT recovery it is important to be clear on the appropriate methodology. In cases where the business is not fully taxable an apportionment is required to reflect non-business or VAT exempt business activities. If you think your business or charity may be entitled to a retrospective repayment of VAT incurred on costs that cannot be directly attributed to taxable supplies please do not hesitate to contact CVC to discuss the best strategy for your individual case. Please remember that, if VAT registered, retrospective claims are capped at four years.